Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target?

Salem Abo-Zaid

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies optimal monetary policy in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that the right index to target depends on the structure of the individual economy. When wages are fully flexible, the consumer price index (CPI) is better to target given low to moderate levels of pass-through. On the other hand, assuming complete pass-through, economies with relatively high degrees of wage rigidity and wage indexation should either target their CPIs or fully stabilize nominal wages. Also, CPI targeting and nominal wage targeting are superior to targeting the Producer Price Index (DPI) in relatively high degrees of pass-through given that wages are relatively rigid and indexation degrees are high. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be conducting monetary policy optimally.

Keywords: Optimal Monetary Policy; Incomplete Pass-Through; Sticky Wages; Inflation Targeting; Conumer Price Index; Domestic Price Index (search for similar items in EconPapers)
JEL-codes: E12 E31 E4 E52 F31 (search for similar items in EconPapers)
Date: 2009-02-05
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13177/1/MPRA_paper_13177.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/16966/1/MPRA_paper_16966.pdf revised version (application/pdf)

Related works:
Journal Article: Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? (2010)
Working Paper: Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13177

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().